Question

East Corp., a calendar-year company, had sufficient retained earnings in 20X3 as a basis for dividends, but was temporarily short of cash. East declared a dividend of $100,000 on April 1, 20X3 and issued promissory notes to its stockholders in lieu of cash. The notes, which were dated April 1, 20X3, had a maturity date of March 31, 20X4 and an interest rate of 10%.How should East account for the scrip dividend and related interest?
A. Debit retained earnings for $110,000 on April 1, 20X3.
B. Debit retained earnings for $110,000 on March 31, 20X4.
C. Debit retained earnings for $100,000 on April 1, 20X3, and debit interest expense for $10,000 on March 31, 20X4.
D. Debit retained earnings for $100,000 on April 1, 20X3, and debit interest expense for $7,500 on December 31, 20X3.

Answer 1

Answer:

D. Debit retained earnings for $100,000 on April 1, 20X3, and debit interest expense for $7,500 on December 31, 20X3.

Explanation:

As  East declared a dividend of $100,000 on April 1, 20X3, the journal entry to record the transaction -

Retained earnings debit                         $100,000

Dividend payable  credit                                  $100,000

As east issued promissory notes and the maturity date of March 31, 20X4, an interest rate of 10% arose. Seance the physical year ended in December 2004, the interest rate was accrued for December 2004 (9 months). The journal entry is

Interest expense debit                           $7,500 (Note - 1)

Interest payable  credit                                      $7,500

Calculation: $100,000 × 10% × (9 ÷ 12)

Calculation: $10,000 × (9 ÷ 12) = $7,500

Therefore, option D is correct.